Moratorium on Internet access tax passed

State and local officials looking for some extra scratch by taxing your dial-up, cable or DSL Internet-access services will have to live with a seven-year itch after Congress on Tuesday banned those fees until 2014.

The House unanimously approved a seven-year extension of a moratorium on Internet-access taxes, which the Senate passed last week. The move cleared the way for President Bush to sign it before the current ban expires Thursday.

For consumers, the legislation largely maintains the status quo: No Internet-access taxes except in the nine states that were grandfathered when the ban was first put in place in 1998. California is not among them.

The legislation applies only to Internet-access taxes, not to sales taxes for online purchases. But it addresses a concern by many lawmakers, technology companies and Internet-service providers that consumers could see the same itemized taxes on their Net-access bills that now appear on their phone and TV cable bills. A monthly phone bill can include as much as $10 in taxes.

"This legislation will help keep the cost of Internet access down so that all individuals can continue to use the great informational tool that is the Internet," Rep. Lamar Smith (R-Texas) said. He and other lawmakers said the legislation would give telecommunications companies the certainty they needed to continue investing in the infrastructure to extend high-speed Internet access throughout the country.

In helping push the extension through Congress, the technology industry showed it was learning the art of the deal in Washington: Ask for a lot, but be willing to compromise.

Major technology companies, including Google Inc., Yahoo Inc. and EBay Inc., formed a coalition with powerful allies, particularly phone and cable companies, and pushed hard for a permanent extension. But they said they were happy to settle for seven years, the longest extension yet.

"It's a recognition by members of Congress of the impact of our industry on the economy," said Mike Platt, vice president for government and political affairs at TechNet, an industry trade group that was part of the Don't Tax Our Web coalition.

For the young technology industry, the lengthy extension is a legislative victory that shows its clout has grown in Washington during the last decade. Still, the industry continues to have trouble when facing a formidable lobbying opponent.

In this case, it was state and local governments, which were concerned that they could lose the ability to tax phone and TV services as more consumers get them delivered over the Internet. Governors and local officials, who have strong ties to many members of Congress, successfully derailed the push for a permanent ban and got the definition of Internet access changed to make clear that phone and TV services delivered online are taxable. Many state and local governments depend on money from taxing those services.

Groups such as the National Governors Assn. and the California Assn. of Counties said they knew of no governments planning to tax Internet access, but they argued that a permanent ban would make it difficult to change the definition in the future to avoid exempting other taxable services. They were pushing for a four-year extension instead of seven.

"A shorter amount of time means if a mistake was made in a definition we could have gotten to it quicker," said David Quam, director of federal relations for the National Governors Assn. "The important thing is it remains temporary."

In a change pushed by Sen. Ron Wyden (D-Ore.), the legislation also clarifies that services related to Internet access, such as instant messaging, e-mail and personal online storage, are not taxable. The move should end continual rumors that Congress was weighing an e-mail tax.

In addition, the bill requires a few states to phase out taxes on wholesale purchases of Internet access. Some companies, including wireless providers, use that access to connect their networks to the Internet backbone. States must stop taxing that access by June 30.

Tuesday's 402-0 vote by the House follows the Senate's unanimous passage of the extension last week. Senators who wanted a permanent ban on Internet taxes succeeded in lengthening a four-year extension passed overwhelmingly by the House on Oct. 16.

This is the third time the ban has been extended. Although the White House has pushed for a permanent extension, Bush is expected to sign the bill.

Rep. Anna G. Eshoo (D-Menlo Park), who represents much of Silicon Valley, said the growing number of technology companies and the role the Internet plays in daily life made it easier than in the past to get a lengthy extension of the ban.

"It's a great contributor to our national economy, and I think that's unquestionable," said Eshoo, who worked to pass the original moratorium in 1998 and was a leading backer of a permanent extension this time. "This is now integrated into the life of every member of Congress, their families and their children and their communities. . . . That experience makes a difference."